Tech giants show strong capital expenditure, Taiwan Semiconductor is listed as a "preferred stock" by Morgan Stanley

Morgan Stanley listed Taiwan Semiconductor as its top pick on Thursday, stating that the strong capital expenditures of large technology companies in the field of artificial intelligence confirm the company's bright prospects. Although Morgan Stanley lowered its target price for Taiwan Semiconductor, it maintained an "Overweight" rating on the stock. Taiwan Semiconductor's U.S. shares rose 4.6% at one point on Thursday, closing up 3.6%.

Morgan Stanley analyst Charlie Chan pointed out that the capital expenditures of Meta and Microsoft show that demand for AI products remains strong.

Given the strong AI capital expenditure guidance released by Meta and Microsoft, we are re-adding Taiwan Semiconductor to our preferred list.

"The strong AI capital expenditures from both companies should alleviate market concerns about a reduction in Taiwan Semiconductor's CoWoS (Chip on Wafer on Substrate) orders."

Media reports indicate that Morgan Stanley had previously delayed listing Taiwan Semiconductor as a top pick mainly due to three major uncertainties: the sustainability of AI demand, the possibility of a joint venture with Intel, and U.S. semiconductor tariffs.

Regarding AI demand, Morgan Stanley stated that investors' recent concerns about a reduction in orders for Taiwan Semiconductor's advanced CoWoS packaging technology seem to be exaggerated.

Analysts wrote:

"Our latest supply chain survey shows that demand for Taiwan Semiconductor's CoWoS-L remains unchanged."

Meta has raised its full-year capital expenditure plan for 2025 by about $7 billion, while Microsoft hinted at shifting part of its capital expenditures... towards shorter-cycle server equipment to fill those data centers."

As for the uncertainty regarding a joint venture with Intel, Morgan Stanley's report indicated that the situation appears less concerning, with limited expectations for Taiwan Semiconductor's role in future CPU production.

"Taiwan Semiconductor's 2nm process will be used to produce both CPU and GPU chip modules, but will share capacity with Intel's 18A node. Taiwan Semiconductor's management has ruled out the possibility of a joint venture."

Regarding semiconductor tariffs, Morgan Stanley noted that there remains uncertainty before the decision on May 7, but did not mention any new risk changes.

Morgan Stanley emphasized:

"Once these uncertainties are resolved, we expect the stock price to rebound quickly."

Morgan Stanley lowered Taiwan Semiconductor's target price from NT$2,454.00 to NT$2,330.00. Despite the target price being lowered, Morgan Stanley still maintains an "Overweight" rating on the stock.

"Compared to peers, Taiwan Semiconductor is a more attractive Overweight (OW) target, with an estimated price-to-earnings ratio of only 15.5 times for 2025."

The "Overweight" rating means that Morgan Stanley analysts expect the total return of Taiwan Semiconductor's stock over the next 12 to 18 months to exceed the average level of the stocks they cover. Listing Taiwan Semiconductor as a "top pick" indicates that analysts believe it has significant potential upside compared to its peers In addition, several financial institutions have made forecasts regarding TSMC's stock price. Bernstein maintains an "Outperform" rating on TSMC, emphasizing that its progress in packaging technology is a strategic asset for future growth. Stifel has adjusted its expectations for TSMC, anticipating that capital expenditures and expansion plans will slow down, leading to a downgrade in the target price. This move reflects concerns about end demand and the potential slowdown of TSMC's aggressive expansion. JP Morgan also lowered its target price but maintained an "Overweight" rating, citing expectations that the revenue guidance for 2025 will be adjusted. The company's revenue for the second quarter is expected to grow by 5-8%, but the impact of tariffs and the global economic slowdown have led to a more cautious outlook for the full-year revenue